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Ethiopian Business Development Services Network (EBDSN)

Accounting and
Cost Calculation
Addis Ababa 2/2004

EBDSN German Technical Cooperation
Accounting and
Cost Calculation
Addis Ababa, Ethiopia
January 2004

Published by:
Ethiopian Business Development Services Network (EBDSN)
P.O.Box 11133 Addis Ababa, Ethiopia
In collaboration with:
Ethio-German TVET Programme,
Ethio-German Micro and Small Enterprises Development Project (GTZ)
On behalf of:
German Technical Cooperation (GTZ)
Project implementation:
GFA Management GmbH, Germany
Fantahun Melles, Dieter Gagel, Bettina Reichl, Christine Peter
Table of contents

1. Accounting Procedures
for Micro and Small Enterprises....................................1
Introduction ...............................................................1
Manual cashbook format ...........................................1
Electronic cashbook format on Excel basis ................2
Electronic cashbook format with accounts (Excel)......2
Records for maintenance services.............................3
Cash sales ticket .......................................................3
Sales on credit ..........................................................4
Raw material inventory..............................................4

2. Cash Flow Statement....................................................5

Definitions of terms used in cash management .........6
Cash flow statement format.......................................7

3. Professional Accounting
Applications for Small and Medium Enterprises ..........8
Accounting software and software providers..............8
Training courses in accounting ..................................8

4. Cost Calculation Manual................................................9

4.1 Identify cost components .......................................9
4.2 Systematise costs................................................10
4.3 Calculate variable costs for each product/service.12
4.4 Calculate fixed costs for each product/service......12
4.5 Calculate total costs per unit ................................13
4.6 How cost calculation improves business ..............13
Price setting ..................................................13
Calculation of the breakeven point.................13
Pricing strategies...........................................14
Ways to reduce costs ....................................15

5. Profit an Loss Statement .............................................16

Profit and Loss Statement format ............................16
Instruction to the Profit and Loss Statement.............16

For more details refer to the publication on “Business planning”

1. Accounting Procedures for Micro and Small Enterprises

Advice in accounting and bookkeeping for medium and large enterprises
should be done by professionals. Most micro and small enterprise
operators do not need a complex accounting system but a rather simple
introduction to a cash book and introduction to how to produce and
keep records in the form of receipts. Micro and Small Enterprises (MSEs)
often face problems with regard to recording their daily transactions. This is
due to the fact that most of the operators do not know how to make such
records in a simple and easy manner. As a result, many operators find it
very difficult to give information on their income and expenses and
eventually do not know whether they have lost or profited from their
business activities. The absence of recording has also caused some
problems in handling customer needs, particularly in maintenance services
and also in cases of sales on credit services. The lack of recording also
makes it very difficult for the tax offices to levy reasonable taxes that are
commensurate with the business activities. As a result, business operators
complain on the taxes that are levied on them on the basis of estimation,
which they say are too heavy to bear.

Cashbook Format
The cashbook is very important to show the situation of the business at any
time, as it provides both the charges and credits for any given period. The
balance column is the difference between the charges and credits columns.

Cash in Cash out Balance
No. Date Description
Birr Ct Birr Ct Birr Ct
1 2.2.04 Initial cash in 2 345 00 2 345 00
2 3.2. Electricity 126 50 2 218 50
3 3.2. Shop rent 930 40 1 288 10
4 4.2. Sales of products 455 70 1 743 80
5 5.2. Taxes 780 90 962 90
6 5.2. Sales of products 1 675 80 2 638 70
7 5.2. Raw materials 1 675 80 962 90
8 7.2. Sales of products 780 45 1 743 35
... ... ...

Electronic Cashbooks
For small and medium enterprises with electronic facilities, an effective but
simple system is an Excel sheet. The following cashbook for download has
the same structure as the manual cashbook above but calculates balance
and sum/balance automatically (see cashbook-1.xls on the above
mentioned web page).

Another possibility is to organize an electronic cashbook with accounts (see

third column). The numbering of the accounts permits you get a monthly or
yearly overview by accounts. Just add up all entries with the same account
number. With Excel the overview of each of the accounts can be shown
automatically if you insert the Autofilter function of Excel (see under “data”
of the Excel menu).

Electronic cashbook with accounts

No. Date Acc Description Cash in Cash out Balance
1 2.2.04 10 Initial cash in 2 345.00 2 345.00
2 3.2. 51 Electricity 126.50 2 218.50
3 3.2. 52 Shop rent 930.40 1 288.10
4 4.2. 10 Sales of products 455.70 1 743.80
5 5.2. 53 Taxes 780.90 962.90
6 5.2. 10 Sales of products 1 675.80 2 638.70
7 5.2. 61 Raw materials 1 675.80 962.90
8 7.2. 10 Sales of products 780.45 1 743.35
9 8.2. 61 Raw materials 345.70 1 397.65
10 9.2. 51 Water 125.60 1 272.05
Sum / Balance 5 256.95 3 984.90 1 272.05

E.g. all entries with the account number 61 may automatically be filtered
and added (see cashbook-2.xls on the web page).

Autofilter for account No. 61

No. Date Acc Description Cash in Cash out Balance
7 5.2. 61 Raw materials 1 675.80 962.90
9 8.2. 61 Raw materials 345.70 1 397.65
Sum of account no. 61 2 021.50

Records for Maintenance Services
This format helps record items that are brought to the business operator for
maintenance purposes. As the format has columns for date indicating when
the items are received, name of client, type of item and the date on which
the maintained item would be submitted to the customer, it helps organize
the operator and provide efficient services. This format helps to avoid
problems of missing the items and respecting dates for delivery.

Records on maintenance services

No. Date item Name of Type of Fee to be Date of Signature
received client item paid submission

Cash Sales Ticket

For payments made give cash sales ticket:

Cash Sales
Name of the Business and address
Receipt No.: Date:
Quantity Description Amount

Ser. Tax

Sales on Credit
The format is useful for recording all credit sales so that the operator is
reminded of the remaining cash to be collected from customers who took
credit services. The format provides information for the business operator
to identify the customer, the date on which sales on credit took place, the
amount of remaining cash to be paid and the date on which it has to be
paid back; it therefore helps the operator to clearly account for his/her
income. This format also helps to identify those who defaulted and those
who paid back on time thereby urging the business owner to take corrective
measures in extending credit sales in the future.

Sales on credit
No. Date Client Product/ Unit Advance Cash to Final Signature
Service value paid be paid payment

Format for Raw Material Inventory

This format helps to record the inventory of raw materials. The operator
deducts the quantity of raw material used from the column of raw material
purchased and maintains the inventory both in terms of quantity and value.
This helps the operator identify the amount of raw materials used during a
given period of time, and the amount of inventory he has. As a result a
proper calculation for expenses incurred is possible.

Raw material inventory

No. Date Raw material Raw material used Inventory
Type Qty Total Type Qty Total Qty Total
value value value

2. Cash Flow Statement


Cash in business can be compared to water that flows in a river. Cash

flows in from sales, loans, and equity. In the process of producing goods
and services, cash flows out to pay for materials, salaries (including the
entrepreneur's), rent, electricity, water, interest, supply, transport.

If there is more water coming out than coming in to the river, then it will
soon dry out. Similarly, businesses having more cash outflows than cash
inflows will soon get into trouble. They will not be able to pay for their
expenses as they fall due - a difficult situation that every prospective
entrepreneur should avoid. Hence, cash flow planning is an important issue
to be considered by the operator. However, many entrepreneurs fail to
realise this. They constantly run the risk of being unable to settle most of
their bills. Poor cash planning practice is a major cause of many small
business failures.

Cash Flow is important to help predict cash needed,

how much money will be needed and when it will be needed,
or to predict cash surplus and plan investments.

The cash planning process begins with figuring out how much cash is
generated from sales receipts as well as other sources like loans, etc. for a
certain time period. This figure represents cash inflows. Obviously, credit
sales are excluded since they are not cash until they are fully paid for.
Then, figure out how much cash is needed to pay all expenses for
materials, rent, salaries, and others. This figure represents cash outflows.
Credit purchases are excluded since they are not cash transactions until
they are fully paid for.

The difference between cash inflows and cash outflows represents the
ending cash balance. This cash balance within a period, say for a month,
will automatically become the beginning balance for the next month.

$$$ Payments: materials,
Sales, loans, equity Business salaries, rent, electricity,
water, interest, supply,

Preparing cash flow projection consists of cash inflows (or cash receipts)
and cash outflows (or cash payments). Likewise, it will have spaces for be-
ginning and ending cash balance. The aim is to ensure that the available
cash will be sufficient to meet the needs and obligations of the proposed
business. If there are more cash outflows than inflows in the cash flow
projection, then measures such as selling more products, converting
personal assets to cash or borrowing some money must be considered to
avoid this situation.

Definitions of Terms used in Cash Management

Cash inflows:
all cash receipts realised within a given period.

Cash sales:
cash revenues realised from sales of finished

Credit sales:
sales made without receiving cash.

a cost charged against fixed assets for their replacement.

Cash outflows:
total of all cash payments.

Example for Cash Flow Statement
Item 0 I II III
Real Forecast Real Forecast Real Forecast Real
1. Initial Cash
2. Inflows:
2.1 Sales
2.1 Others
2. Total Inflows
3. Outflows:
3.1 Dividends
3.2 Labour Costs
3.2 Promotion Material
3.3 Rent
3.4 Energy
3.5 Telephone
3.6 Publicity / Promotion
3.7 Renovation
3.8 Registration fee
3.9 Others:
Insurance etc.
3. Total Outflows

4. Net Flow Return (2-3)

5. Final Cash Flow (1+4)

3. Professional Accounting
Applications for Small and Medium Enterprises

For small and medium enterprises professional accounting is needed in

order to comply with accounting standards acceptable by the tax authority.
Thus, the list of adapted softwares, providers and training institutions are
provided below for your reference.

3.1 Accounting Software and Software Providers

CyberSys Technology
Befekadu building, Bole road, opposite to Saay pastry
Software: - Peachtree accounting, Original 300 Birr
- Quick Book accounting, ask for price
- DAC accounting, ask for price

P.O.Box 1612 Addis Ababa, Tel. 620425, 620729, Fax 620840
Software: - Peachtree Accounting

3.2 Accounting Training Courses

Befekadu building, Bole road, opposite to Saay Pastry
P.O.Box 19674 Addis Ababa
Courses provided: Peachtree accounting, 40 Hrs, 700 Birr
Quick Book accounting, 28 Hrs, 700 Birr
DAC accounting, 28 Hrs, 700 Birr
Web page design, 20 Hrs, 600 Birr

African Lakes
Near the National Stadium, P.O.Box 3533 Addis Ababa, Tel. 518444
Courses provided: Peachtree accounting 2002, 50 Hrs, 690 Birr
Other as Word, Excel, Access, Windows

City Business Computers

Bole Road, in front of Bole Printing Enterprise, P.O.Box 6052 Addis Ababa
Tel. 517197, 513365, 533730, Fax 251-1-522756
Courses provided: Peachtree accounting

4. Cost Calculation Manual

Many people are unaware of costs and waste scarce resources. Be cost
conscious and think about systematic but simple cost calculation! Cost
calculation is the way to calculate the total costs of making and selling a
product or providing a service. How can it improve the business? Costing
helps to:
set prices;
control and reduce costs;
plan for the future;
make better decisions;
write a business plan to obtain a credit.

1. identify cost components;
2. systematise costs;
3. calculate variable costs;
4. calculate fixed costs;
5. calculate total costs per unit;
6. set prices, deduct the breakeven point.

4.1 Identify Cost Components

What cost components are involved in this enterprise?

raw materials;
electricity, transport, rent, water;
machinery, equipment and tools.

manpower, entrepreneur’ s salary;
stationery, telephone, rent, electricity, insurance;

publicity, promotion, commissions.


List all costs in simple tables, such as:
Material, electricity etc.
Items Quantity Costs Remarks
Flour 10 kg 2 Birr per kg (variable)
Sugar 10 kg 5 Birr per kg (variable)
.... (v or f)

Machinery, equipment, tools

Items Costs Estimated use Remarks
..... (v or f)
Dough mixer 6000 Birr 5 years (fix)

Calculate the labour costs per hour for each employee:

Name Job description Costs per month Costs per hour
..... Administration: ... (fix)
..... Production: ... (v or f)
..... ....

Calculate the working hours and the direct labour costs needed
to finish the product/service:
Production process
Step Time Executed by Costs

The cost of a step in the production process is calculated by multiplying the

manpower cost per hour of the employee executing this step and the
required time.

4.2 Systematise Costs

Each operator has to differentiate between costs like rent and flour (e.g. in
a bakery) to deduce the concept of fixed and variable costs.
Fixed costs are the sum of all costs required to produce any
product. They do not change when the volume of
production/service is changed. Fixed costs can include
facilities costs, certain general and administrative costs,
interest and depreciation expenses.

Variable costs are costs associated with producing additional
units. They do change with the volume of production/service.
They can include direct material and labour costs,
transportation and sales commission expenses.
Variable unit cost: Cost associated with producing one
additional unit.
Total costs: Sum of fixed costs and variable costs.
This concept implies that (due to contracts, commitments etc.) fixed cost
components can be reduced only after a certain period of time. In principle,
the classification of costs depends on the type of production. Furthermore,
some components can be both fixed and variable in the same enterprise:
Electricity consumed by a production unit is variable, while electricity for the
office building is fixed cost. However, there are some rules of thumb:

Examples of fixed and variable costs

Fixed costs Variable costs
Bakery Carpentry Retailer Services
Items Administration Flour Wood Goods’ Materials,
expenses (tel, sugar hinges cost spare
fax), stationery, eggs paint parts’used
rent, electricity, salt screws in the
water, transport butter glue... service....
public services milk ... electricity electricity
maintenance electricity water
advertisement water
Man- Entrepreneur’ s Salary per Salary per Sales Fee per
power salary, wages and produced produced commis- delivered
salaries (not piece piece, per piece sions service
wage!) kg

raw materials normally entail variable costs;

productive work being directly related to the product or
service results in direct labour costs, which are variable;
administration costs are mostly fixed costs.

The operator should classify one by one all his costs as variable or fixed.
Does he understand the difference between fixed and variable costs? Only
when he is able to classify his costs, can he calculate the fixed costs and
the variable cost per unit of each of his products - the basis for pricing.

4.3 Calculate variable Costs for each Product/Service

Item Cost (pur- Used quantity per Cost per unit

chasing unit (product, (price / used quantity)
price) service)
Raw materials
- flour 2 Birr per kg 10 kg per 100 cakes 20 Birr per 100 cakes
- sugar... 5 Birr per kg 1kg per 100 cakes 5 Birr per 100 cakes
Labour costs..
(1) Variable Costs per unit 25 Birr per 100 cakes
0,25 Birr per cake

If a unit produced is very small (e.g. cake) and during the relevant period
thousands of units are produced, it is not necessary to quote exactly the
quantity of raw material used per unit. Rather, one can take quantities used
per 100 or 1000 units. However, at the end variable costs have to be
adjusted to one unit. (see example)

4.4 Calculate fixed Costs for each Product/Service

Item Fixed cost/month

Salaries (administration)
Depreciation of building, machines....
(2) Total fixed costs
(3) Monthly production (in units)
(4) Fixed cost per unit (2/3)

Depreciation is the theoretical price to the use of an asset. One of the

various methods of calculating depreciation, and the simplest one, is to
divide the purchasing price of the asset by its period of usage.

Example: A machine costs 6,000 Birr and is supposed to work for 5 years
Depreciation per year: 6,000 Birr / 5 years = 1,200 Birr per year.
Depreciation per month: 1,200 Birr / 12 months = 100 Birr per month.

If the business produces more than one product, the fixed costs have first
to be split between products as exactly as possible. The relation of total
variable costs for each single product can be used as an estimator for the
split up of fixed costs.

4.5 Calculate total Costs per Unit
Add up variable and fixed costs per unit
(1) Variable costs per unit
(4) Fixed cost per unit
(5) Total cost per costing unit (1 + 4)

4.6 How Cost Calculation improves Business

Price setting
To set prices the operator needs the following information
his costs;
how much the customers are willing to pay.

In general the price must be

low enough to attract customers to buy;
high enough to give the business a profit.
To make a profit, the price must be higher than the total costs of the
product! Hence, knowing the total costs of a product is essential in
determining the price.

There are two methods:

the business operator takes his total costs per unit and adds
a percentage margin to get his selling price;
the operator takes the prices of his competitors and makes
sure that his prices are competitive with theirs. But he has to
make sure that his prices cover his total costs!

However, only if the product is better than that of competitors and the
operator is able to transfer the additional benefit to the customers, he can
charge more than his competitors.

Calculation of the breakeven point

The breakeven point is an estimate of the level of sales necessary to
operate a business profitably, i.e. how many units of a product must be sold
at a given price to make a profit.

The following steps are involved in calculating the breakeven point:
identify the total fixed and variable costs of the business
based on actual results during a relevant time period.

Calculate the contribution margin as follows:

contribution margin per unit = selling price per unit - variable costs per unit

this amount is available to offset fixed expenses and

(hopefully) produce an operating profit for the business.

Calculate the breakeven point as follows:

breakeven unit volume = total fixed costs / contribution margin per unit

If sales exceed the breakeven unit volume, the business makes profit; if
not, the business makes a loss.

By performing a breakeven analysis and then varying the assumptions

regarding sales levels and variable and fixed costs, the real factors behind
the profit potential (or lack thereof) of a business become more clear. This
process will highlight the most significant factors and assumptions
(particularly assumptions about the ability to set prices) in the buyer's
business plan.

Pricing strategies

Generally, the sales price for a product or service should cover more than
the variable costs of producing that product, but the margin from sales must
be enough to cover fixed costs as well.

If the sales price does not cover total costs, it can, however, still cover the
variable costs. Then an appropriate strategy would be to implement
measures to increase sales. If the market share can’ t be modified, this may
require reduction of fixed costs - to make fixed costs become variable.

But if the sales price is below variable costs, it does not make sense to sell
more. With every additional unit sold, the operator increases his losses.
Then measures to increase sales would not be an appropriate strategy, the
operator rather has to reduce his variable costs. Reducing fixed costs –
though always recommendable – would not be sufficient!
Pricing Strategy

Total costs per unit

Birr Competitors’price: sell more, reduce costs

Fixed costs per unit

Do not try to sell more before you
Variable costs per unit reduced variable costs per unit !!!

Ways to reduce costs

Many people are unaware of costs and therefore waste scarce resources.
Making an operator cost conscious is always a good point, particularly
when he has the potential to reduce costs without neglecting quality:
turn off a tap which is running;
handle your tools and equipment with care; clean your tools;
switch off any unnecessary light and machines which are not
work faster, but still be precise.

Reduce variable costs:

find cheaper suppliers, but at the same or better quality;
find others and co-operate to order larger quantities;
share expenses with others;
the higher the stock, the higher the interest expense; but: the
lower the minimum stock the higher the risk of running out of
improve the workplace layout: good workshop layout means
that the product travels and is handled as little as possible
between processes from the beginning to the end of its

Make fixed costs become variable:

if average utilisation of equipment or human resources is
low, it can make sense to outsource these
services/production. Then the operator has to rent/buy the
product/service only when necessary.

5. Profit and Loss Statement
The Profit and Loss Statement is the final accounting procedure to be
presented to the taxation authorities, in order to be taxed on the real activity
and not on estimation basis.

Company ............................................
Profit and Loss Statement
Period: from............... to....................
Gross Sales
Less: Returns and allowances -
= Net Sales =
Less: - Costs of goods sold -
- Direct material -
- Direct labour -
- Factory overhead -
= Gross Profit =
Less: - Administrative and selling expenses -
- Salaries -
- Telephone -
- Water -
- Electricity -
- Rentals -
- Others -
= Operating Profit =
Less: - Interest expense -
= Net Profit before Tax =
Less: - estimated Income Tax -
= Net Profit after Tax =

Instruction to the Profit and Lost Statement

The Profit and Loss (P+L) Statement is one of the financial analysis tools
employed by business enterprises to track the performance of their
enterprises. The P+L Statement is the difference between sales and
expenses of an enterprise over a given period of time, often one year. If
this difference is positive, it is termed profit, while if it is negative, it is then
termed loss.

The P+L Statement is important for business operators/managers in
checking the efficiency of their business strategies and taking proper
actions. The Statement is also important for bankers to check business
profitability, in order to comply or not with their investment requests before
extending credit. The Statement can only be drawn up based on certain
source documents such as the cashbook: otherwise it would be very
difficult to apply, especially for micro enterprises. For the Statement to be
applied in a given enterprise a certain level of accounting system is needed
to be in place. The P+L Statement is made up of the following components:
Gross sales: total value of sales which is obtained by multiplying
the price of each product with the total units of output sold.
Returns and allowances: stands for the value of damaged goods
that are returned by customers to the business enterprise for which
the business replaces the damaged goods with new. It also
considers payments that are made as sales commissions,
discounts, etc., which again are deducted from Gross Sales to
result in Net Sales.
Costs of goods sold: stands for the costs involved with regard to
direct labour, direct material and factory overhead costs which are
deducted from Net Sales to arrive at Gross Profit.
Direct material: stands for those material costs directly accrued in
the production process, such as raw material.
Direct labour: refers to costs of all labour inputs directly used in
the production of goods/services of a given enterprise. The direct
labour costs are measured on unit rates and costs of daily labour.
Factory overhead costs: stands for those costs incurred, but
which are not directly related to the production process. E.g.
depreciation of machinery or equipment, factory shade rent.
Administrative and selling expenses: includes costs incurred for
certain administrative purposes and for the distribution of products.
These are deducted from Gross Profit to arrive at Operating Profit.
These expenses are, for example, salaries of management and
support staff, expenses related to telephone, water and electricity
bills as well as office rents and other similar expenses.
Interest expense: this is the amount of interest to be paid on the
amount of loan obtained, based on the current interest rate.
Estimated income tax: the amount of tax that has to be paid as
per the income tax proclamation.

Ethiopian Business Development Services Network (EBDSN)

List of Publications for Business Development

Start and Improve your Business (this volume will be published in 6/2004)
Identification of viable business ideas, market and supply analysis, write a
business plan, organise business management, evaluate sales, improve
and diversify products.
Marketing Strategies for Micro, Small and Medium Enterprises
Marketing problems faced by Ethiopian businesses, marketing strategies,
managing prices, product development and promotion.
Trade Fair Participation and Export Guide
Trade Fair participation, export procedures, export business registration
and licensing, Ethiopian trade statistics, quality export products information.
Business Planning
Business planning for micro, small and medium enterprises: personal data,
equipment owned and to be purchased, work premises at the disposal of
the operator, production/service plan, raw material requirement, yearly
sales plan, operating expenses, profit and loss statement.
Accounting and Cost Calculation Manual
Manual and electronic cash book formats, records on maintenance
services, receipt, sales on credit, raw material inventory, cash flow
statement, accounting software and software providers in Ethiopia, cost
calculation, identify cost components, calculate variable and fixed costs,
calculate total cost per unit, how cost calculating improves your business.
Loan Conditions of Commercial Banks and Micro-Finance Institutions
Loan conditions in Ethiopia: loan types, loan term, lending rate, re-payment
schedule, type of collateral, loan criteria, eligibility.
Improve your Business Association
Needs assessment of your members, situation analysis, action planning,
services, fundraising, membership fees and accounting.
Standards and Quality in Ethiopia
How are Ethiopian standards developed, conformity assessment, testing,
product certification, metrology.
Investment Guide
Business environment, investment opportunities and conditions, taxation
and incentives, investment protection.

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